Steady growth in gaming and fintech helped Tencent achieve better-than-expected profits in the second quarter, but advertising revenue expansion slowed considerably due to competition from Bytedance.

Why it matters: As short video becomes an increasingly important medium for brands to promote themselves, Tencent’s lack of a product to rival Bytedance’s Douyin could impact the company’s bottom line in terms of advertising.

  • Tencent has been trying to curb the expansion of Bytedance. The company filed seven lawsuits from March to May this year to stop the Beijing firm’s apps hosting footage from Tencent’s games.

“Our assumption is that the macro environment will remain difficult for the rest of the year and that the heavy supply of advertising inventory will continue potentially into next year … In terms of what we can do, some of the challenges around the macroeconomic situation and the industry-wide inventory supply are not within our direct control.

—Tencent CEO Martin Lau in response to an analyst question during the earnings call

Details: Tencent’s Q2 revenue rose 21% year on year to RMB 88.8 billion ($12.9 billion), falling short of analysts’ expectations of RMB 93.42 billion, according to data provider Refinitiv. Net profit for the period increased by one-third to hit RMB24.1 billion.

  • With the freeze on new game approvals lifted, Tencent rolled out 10 titles in the quarter such as role-playing game “Perfect World Mobile,” boosting the unit’s earnings 8% to RMB 27.3 billion.
  • Fintech and business services revenue grew 37% to RMB 22.9 billion, accounting for 25.8% of the company’s total income.
  • Online advertising income rose 16%, but growth slowed from a 39% expansion in the same period of 2018. Tencent attributed the deacceleration to a “challenging macro environment and increased supply of short video advertising inventories across the industry.” This sector accounted for close to one-fifth of total revenue.
  • CEO Martin Lau aims to “control the rate of inventory growth,” and “provide new tools to advertisers, capabilities in terms of targeting ads to the right users” to fuel expansion in the unit.
  • The company revealed that its messaging app WeChat reached 1.1 billion monthly active users worldwide at the end of June.
  • “PUBG Mobile” rebrand “Game for Peace,” also known as “Peacekeeper Elite,” has reached 50 million daily active users since its launch in May.

Context: Due to the lack of new game approvals in China, Tencent only launched one game in the first quarter. In 2018, the company took an even more substantial hit due to the nine-month freeze on game monetization licenses, recording no year-on-year growth in online gaming revenues in the fourth quarter.

Tony Xu is Shanghai-based tech reporter. Connect with him via e-mail:

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